The New Arthurian Economics

Friday, July 29, 2011

A picture of the raw numbers gives a feel for what has happened in Japan:

Graph #1

Same data, showing percent change from previous year:

Graph #2

Graph #1 shows GDP flat since 1990 and M1 money climbing to meet it, while total debt sits in a holding pattern at over five times the level of GDP.

Graph #2 shows GDP settling down around zero percent growth by 1993, and debt settling down to zero growth by the latter 1990s. These observations are reflected in Graph #1 as horizontalness of the red and yellow trend lines. The only growth shown on Graph #2 since the early 1990s is the growth of the money supply.

Graph #1 again: The red line, GDP, goes flat. But the plan is that GDP should get bigger: Make the pie bigger so everyone can have more. So the flatline is no good.

Graph #1, the blue line, M1 money, goes up. If you look at the space between the blue and yellow lines, that is a pretty big gap. The yellow line, we can safely assume, is not money that people earned and spent, but money they borrowed and spent, people and businesses and government. The blue line shows how much money there is in the economy that can be used to pay off debt.

Actually, even the blue line includes some debt. So there is even less money than the blue line shows, that can be used to pay off debt. And the blue is far below the yellow.

Now, the blue line doesn't have to be as high up as the yellow line, because money changes hands. I might bring the yellow line down by paying off my debt to you. And then you might bring it down more, using the same money to pay off a debt to someone else. The money gets recycled. So it is okay if the yellow line is somewhat higher than the blue.

But the gap between the yellow and blue lines is filled with cost. It is filled with the cost of interest. And the bigger the gap, the bigger the cost. That cost is an obstacle standing in the way of productive work. That cost is an obstacle that interferes with the growth of GDP. It is an obstacle that consumes money that should be going to wages. It consumes money that should be going to profit.

It is true, as people often say, that money paid as interest expense is also interest income. But where is the output in that? Where is the product? Where is the GDP? Where is the stuff produced? There is no product to offset the cost. And that is the trouble with excessive debt in Japan, in the U.S. and everywhere.